**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,DC 20549**

 

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**AMENDMENT NO. 1 TO FORM 10-Q**

 

**Mark One**

**ý****Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**for the Quarterly Period Ended June 30,2005.**

 

**or**

 

**o****Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**for the Transition Period From                To                .**

 

**Commissionfile number:  000-25755**

 

**WORLDGATE COMMUNICATIONS, INC.**

(Exact Name of Registrant as Specifiedin Its Charter)

 
| **Delaware**              | ** ** | **23-2866697**                        |
|---------------------------|------------|---------------------------------------|
| (State of  Incorporation) |       | (I.R.S.  Employer Identification No.) |

 

**3190Tremont Avenue**

**Trevose,Pennsylvania 19053**

(Address of Principal ExecutiveOffices)                            (ZipCode)

 

**(215) 354-5100**

(Registrant’s Telephone Number,Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes o No ý

 

As of August 4, 2005, there were 38,579,857 shares of commonstock, par value $.01 per share, outstanding.

 

 

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**EXPLANATORYNOTE**

 

WorldGate Communications, Inc.(the “Company”) is filing this Amendment No. 1 on Form 10-Q/A toamend its Quarterly Report on Form 10-Q for the quarter ended June 30,2005, as filed with the Securities andExchange Commission (the “SEC”) on August 15, 2005 (the “OriginalFiling”).  The purpose of this Amendment No. 1is to amend and restate Part I, Item 1 and Item 2 which set forth theaccounting for the warrants and additional investments rights issued in privateplacementsof the Company’s common stock during the fourth quarter of 2003 and thefirst and fourth quarters of 2004.  Thesesecurity components were originally treated as non-cash expenses and with thisamendment are being restated as equity transactions.  Accordingly, changes have been made to theapplicable line items associated with additional paid-in capital, accumulateddeficit, general and administrative costs, net (loss) income and net (loss)income per common share.  In addition, Part I,Item 1 and Item 2 and Part II, Item 2 have been amended and restated toreflect certain clarifications made in response to the SEC’s comments as raisedin its review of the Company’s registration statement on Form SB-2/A, asfiled with the SEC on August 30, 2005, and annual report on Form 10-K/Afor the year ended December 31, 2004, as filed with the SEC on August 30,2005. Finally the certifications attached as Exhibits 31.1, 31.2, 32.1 and 32.2have been updated to reflect the filing date of this amendment and interimchanges in the regulations applicable to these certifications.  Except as described above, no additions ormodifications have been made to this Amendment No. 1 to reflect facts orevents occurring subsequent to the date of the Original Filing.

 

2

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WORLDGATE COMMUNICATIONS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED JUNE 30,2005

 

TABLE OF CONTENTS

 
| PART I. FINANCIAL INFORMATION                                                                  |   |
|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                |   |
| Item 1. Financial Statements                                                                        | 4      |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 14     |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 | 19     |
| Item 4. Controls and Procedures                                                                     | 19     |
|                                                                                                |   |
| PART II. OTHER INFORMATION                                                                     |   |
|                                                                                                |   |
| Item 1. Legal Proceedings                                                                           | 20     |
| Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                | 20     |
| Item 3. Defaults Upon Senior Securities                                                             | 20     |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        | 20     |
| Item 5. Other Information                                                                           | 20     |
| Item 6. Exhibits                                                                                    | 21     |

 

3

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PART I.FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

**WORLDGATECOMMUNICATIONS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(DOLLARSIN THOUSANDS)**

 
| ** **                                                                                                                                                                                           | ** ** | **As of  June 30,  2005**    | ** ** | **As of  December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **(Unaudited  and as  restated)** | ** ** | **(Audited and  as restated)**     | ** ** |
|                                                                                                                                                                                                 |       |                              |       |                               |       |
| ASSETS                                                                                                                                                                                               |       |                              |       |                               |       |
| Current  assets:                                                                                                                                                                                     |       |                              |       |                               |       |
| Cash and  cash equivalents                                                                                                                                                                           |       | $                                 | 7,520      |                               | $          | 11,840 |   |
| Accounts  Receivable                                                                                                                                                                                 |       | 1,075                             |       | 0                                  |       |
| Other  receivables                                                                                                                                                                                   |       | 40                                |       | 28                                 |       |
| Inventory,  net                                                                                                                                                                                      |       | 1,004                             |       | 46                                 |       |
| Prepaid and  other assets                                                                                                                                                                            |       | 354                               |       | 184                                |       |
| Total current assets                                                                                                                                                                                 |       | 9,993                             |       | 12,098                             |       |
| Property and  equipment                                                                                                                                                                              |       | 3,852                             |       | 3,530                              |       |
| Less:  accumulated depreciation and amortization                                                                                                                                                     |       | (2,157                            | )          | (1,815                             | )          |
| Property and  equipment, net                                                                                                                                                                         |       | 1,695                             |       | 1,715                              |       |
| Deposits and  other assets                                                                                                                                                                           |       | 9                                 |       | 9                                  |       |
| Total assets                                                                                                                                                                                         |       | $                                 | 11,697     |                               | $          | 13,822 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIENCY)                                                                                                                                              |       |                              |       |                               |       |
| Current liabilities:                                                                                                                                                                                 |       |                              |       |                               |       |
| Accounts  payable                                                                                                                                                                                    |       | $                                 | 1,971      |                               | $          | 222 |   |
| Accrued  expenses                                                                                                                                                                                    |       | 879                               |       | 951                                |       |
| Accrued  compensation and benefits                                                                                                                                                                   |       | 357                               |       | 540                                |       |
| Dividend  payable on Preferred Stock                                                                                                                                                                 |       | 30                                |       | 85                                 |       |
| Detachable  Warrants                                                                                                                                                                                 |       | 2,514                             |       | 5,583                              |       |
| Notes  payable                                                                                                                                                                                       |       | 230                               |       | 37                                 |       |
| Conversion  option on Preferred Stock                                                                                                                                                                |       | 1,348                             |       | 8,612                              |       |
| Deferred  revenues                                                                                                                                                                                   |       | 10                                |       | 369                                |       |
| Total  liabilities                                                                                                                                                                                   |       | 7,339                             |       | 16,399                             |       |
| Commitments                                                                                                                                                                                          |       | 0                                 |       | 0                                  |       |
| Redeemable  Preferred Stock; 2,425 shares outstanding at June 30, 2005, and 6,775  outstanding at December 31, 2004                                                                        |       | 1,858                             |       | 2,995                              |       |
|                                                                                                                                                                                                 |       |                              |       |                               |       |
| Stockholders’  equity (deficiency):                                                                                                                                                             |       |                              |       |                               |       |
| Preferred  Stock, $.01 par value, 13,500,000 shares authorized; redeemable shares issued  7,550 at June 30, 2005 and December 31, 2004                                                     |       | 0                                 |       | 0                                  |       |
| Common  Stock, $.01 par value; 80,000,000 shares authorized, 33,840,802 shares issued  and outstanding at June 30, 2005 and 30,865,777 shares issued and  outstanding at December 31, 2004 |       | 338                               |       | 308                                |       |
| Additional  paid-in capital                                                                                                                                                                          |       | 218,888                           |       | 212,439                            |       |
| Accumulated  deficit                                                                                                                                                                                 |       | (216,726                          | )          | (218,319                           | )          |
| Total  stockholders’ equity (deficiency)                                                                                                                                                        |       | 2,500                             |       | (5,572                             | )          |
| Total  liabilities and stockholders’ equity (deficiency)                                                                                                                                        |       | $                                 | 11,697     |                               | $          | 13,822 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

4

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**WORLDGATECOMMUNICATIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

**(Dollarsin Thousands, Except per Share Amounts)**

 
| ** **                                                                                                                                                                                                                                                   | ** ** | **Three Months ended June 30,** | ** ** | **Six Months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                   | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                                   | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Total  Revenues                                                                                                                                                                                                                                              |       | $                                    | 1,789      |                               | $          | 0 |   | $ | 1,967 |   | $ | 0 |   |
| Less:  Product Launch Discount                                                                                                                                                                                                                               |       | (390                                 | )          | 0                                  |       | (390 | ) | 0 |   |
| Net Revenue                                                                                                                                                                                                                                                  |       | 1,399                                |       | 0                                  |       | 1,577 |   | 0 |   |
| Cost of  revenues                                                                                                                                                                                                                                            |       | 1,266                                |       | 0                                  |       | 1,390 |   | 0 |   |
| Gross  margins                                                                                                                                                                                                                                               |       | 133                                  |       | 0                                  |       | 187 |   | 0 |   |
|                                                                                                                                                                                                                                                         |       |                                 |       |                               |       |   |   |   |   |
| Engineering  and development (excluding depreciation and amortization amounts of $73 and  $102 for the three months ended June 30, 2005 and 2004, respectively,  and $139 and $204 for the six months ended June 30, 2005 and 2004,  respectively) |       | 1,373                                |       | 799                                |       | 2,679 |   | 1,599 |   |
| Sales and  marketing (excluding depreciation and amortization amounts of $10 and $0 for  the three months ended June 30, 2005 and 2004, respectively, and $18 and  $0 for the six months ended June 30, 2005 and 2004, respectively)               |       | 640                                  |       | 408                                |       | 1,018 |   | 599 |   |
| General and  administrative (excluding depreciation and amortization amounts of $88 and $0  for the three months ended June 30, 2005 and 2004, respectively, and  $185 and $0 for the six months ended June 30, 2005 and 2004,  respectively)      |       | 887                                  |       | 1,001                              |       | 1,734 |   | 2,044 |   |
| Depreciation  and amortization                                                                                                                                                                                                                               |       | 171                                  |       | 102                                |       | 342 |   | 204 |   |
| Total  expenses from continuing operations before interest, other income (expense),  change in fair value of warrants and conversion options                                                                                                                 |       | 3,071                                |       | 2,310                              |       | 5,773 |   | 4,446 |   |
| Loss from  continuing operations                                                                                                                                                                                                                             |       | (2,938                               | )          | (2,310                             | )          | (5,586 | ) | (4,446 | ) |
| Interest and  other income                                                                                                                                                                                                                                   |       | 109                                  |       | 13                                 |       | 175 |   | 20 |   |
| Change in  fair value of warrants and conversion options                                                                                                                                                                                                     |       | 2,466                                |       | 348                                |       | 7,642 |   | 348 |   |
| Interest and  other expense                                                                                                                                                                                                                                  |       | (3                                   | )          | (2                                 | )          | (3 | ) | (3 | ) |
| (Loss)  income from continuing operations                                                                                                                                                                                                                    |       | (366                                 | )          | (1,951                             | )          | 2,228 |   | (4,081 | ) |
| Income from  discontinued operations                                                                                                                                                                                                                         |       | 0                                    |       | 7                                  |       | 0 |   | 29 |   |
| Net (loss)  income                                                                                                                                                                                                                                           |       | (366                                 | )          | (1,944                             | )          | 2,228 |   | (4,052 | ) |
| Accretion on  preferred stock and dividends                                                                                                                                                                                                                  |       | (139                                 | )          | (31                                | )          | (635 | ) | (31 | ) |
| Net (loss)  income available to common stockholders                                                                                                                                                                                                          |       | $                                    | (505       | )                                  | $          | (1,975 | ) | $ | 1,593 |   | $ | (4,083 | ) |
| (Loss)  income from continuing operations per common share:                                                                                                                                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                        |       | $                                    | (0.01      | )                                  | $          | (0.07 | ) | $ | 0.07 |   | $ | (0.15 | ) |
| Fully  Diluted                                                                                                                                                                                                                                               |       | $                                    | (0.01      | )                                  | $          | (0.07 | ) | $ | 0.06 |   | $ | (0.15 | ) |
| Income from  discontinued operations per common share:                                                                                                                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                        |       | $                                    | 0.00       |                               | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| Fully  Diluted                                                                                                                                                                                                                                               |       | $                                    | 0.00       |                               | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| Net (loss)  income per common share:                                                                                                                                                                                                                         |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                        |       | $                                    | (0.01      | )                                  | $          | (0.07 | ) | $ | 0.07 |   | $ | (0.15 | ) |
| Fully  Diluted                                                                                                                                                                                                                                               |       | $                                    | (0.01      | )                                  | $          | (0.07 | ) | $ | 0.06 |   | $ | (0.15 | ) |
| Net (loss)  income available to common shareholders per common share:                                                                                                                                                                                        |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                        |       | $                                    | (0.02      | )                                  | $          | (0.07 | ) | $ | 0.05 |   | $ | (0.15 | ) |
| Fully  Diluted                                                                                                                                                                                                                                               |       | $                                    | (0.02      | )                                  | $          | (0.07 | ) | $ | 0.06 |   | $ | (0.15 | ) |
| Weighted  average common shares outstanding:                                                                                                                                                                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                        |       | 33,546,229                           |       | 27,898,268                         |       | 32,569,598 |   | 27,380,133 |   |
| Fully  Diluted                                                                                                                                                                                                                                               |       | 33,546,229                           |       | 27,898,268                         |       | 38,432,028 |   | 27,380,133 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

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**WORLDGATECOMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(Dollars in Thousands)**

 
| ** **                                                                                                                    | ** ** | **Six Months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                                                                    | ** ** | ** **                         | ** ** | **(As restated)** | ** ** |
| Cash flows  from operating activities:                                                                                        |       |                               |       |   |   |
| Net income  (loss)                                                                                                            |       | $                                  | 2,228      |   | $ | (4,052 | ) |
| Income from  discontinued operations                                                                                          |       | 0                                  |       | (29 | ) |
| Adjustments  to reconcile net income (loss) to net operating cash flow from operating  activities from continuing operations: |       |                               |       |   |   |
| Depreciation  and amortization                                                                                                |       | 342                                |       | 204 |   |
| Change in  fair value of warrants and conversion options                                                                      |       | (7,642                             | )          | (348 | ) |
| Non-cash  stock based compensation                                                                                            |       | 0                                  |       | 1 |   |
| Changes in  operating assets and liabilities:                                                                                 |       |                               |       |   |   |
| Accounts  receivable                                                                                                          |       | (1,075                             | )          | 0 |   |
| Other  receivables                                                                                                            |       | (12                                | )          | 28 |   |
| Inventory                                                                                                                     |       | (958                               | )          | 0 |   |
| Prepaid and  other assets                                                                                                     |       | 60                                 |       | 247 |   |
| Accounts  payable                                                                                                             |       | 1,749                              |       | (294 | ) |
| Accrued  expenses                                                                                                             |       | (72                                | )          | 477 |   |
| Accrued  compensation and benefits                                                                                            |       | (183                               | )          | 40 |   |
| Other                                                                                                                         |       | (359                               | )          | 285 |   |
| Net cash  used in continuing operations                                                                                       |       | (5,922                             | )          | (3,441 | ) |
| Net cash  provided by discontinued operations                                                                                 |       | 0                                  |       | 46 |   |
| Net cash  used in operating activities                                                                                        |       | (5,922                             | )          | (3,395 | ) |
| Cash flows  from investing activities of continuing operations:                                                               |       |                               |       |   |   |
| Capital  expenditures                                                                                                         |       | (322                               | )          | (30 | ) |
| Net cash  used in investing activities                                                                                        |       | (322                               | )          | (30 | ) |
| Cash flows  from financing activities of continuing operations:                                                               |       |                               |       |   |   |
| Payment of  Note Payable                                                                                                      |       | (37                                | )          | 0 |   |
| Proceeds  from issuance of common stock                                                                                       |       | 21                                 |       | 2,509 |   |
| Proceeds  from issuance of redeemable preferred stock                                                                         |       | 0                                  |       | 7,111 |   |
| Proceeds  from the exercise of stock options                                                                                  |       | 465                                |       | 126 |   |
| Proceeds  from the exercise of stock rights and warrants                                                                      |       | 1,475                              |       | 620 |   |
| Net cash  provided by financing activities                                                                                    |       | 1,924                              |       | 10,366 |   |
| **Net  (decrease) increase in cash and equivalents**                                                                          |       | (4,320                             | )          | 6,941 |   |
| **Cash and  cash equivalents, beginning of period**                                                                           |       | 11,840                             |       | 3,365 |   |
| **Cash and  cash equivalents, end of period**                                                                                 |       | $                                  | 7,520      |   | $ | 10,306 |   |
| Cash paid  for interest                                                                                                       |       | $                                  | 1          |   | $ | 2 |   |
| Non-cash  financing activities:                                                                                               |       |                               |       |   |   |
| Conversion  of preferred stock to common stock                                                                                |       | $                                  | 4,350      |   | $ | 0 |   |
| Issuance of  common stock for payment of dividend                                                                             |       | $                                  | 168        |   | $ | 0 |   |
| Issuance of  note payable to finance D & O insurance                                                                 |       | $                                  | 230        |   | $ | 256 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

6

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WORLDGATE COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

 

(Dollar Amounts are inThousands, Except for per Share and Share Data)

(Unaudited)

 

1.                                       Basisof Presentation.

 

The unaudited financial statements ofWorldGate Communications, Inc. (“WorldGate” or the “Company”) for thethree and six months ended June 30, 2005 and June 30, 2004 presentedherein have been prepared by the Company pursuant to the rules andregulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations.  These financial statements should be read inconjunction with the consolidated financial statements for the year ended December 31,2004 and the notes thereto included in the Company’s Annual Report on Form 10-K.

 

The financial information in this Reportreflects, in the opinion of management, all adjustments of a normal recurringnature necessary to present fairly the results for the interim period.Quarterly operating results are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2005.

 

2. Restatement

 

The Company has restated its financial statementsfor the six months ended June 30, 2005 to amend and restate the accountingfor the warrants and additional investments rights issued in a privateplacement of the Company’s common stock during the fourth quarter of 2003, andthe first and fourth quarters of 2004.  Thesesecurity components were originally treated as non-cash expenses and with thisrestatement are being restated as equity transactions.There is no cash impact associated with these restatements. There were alsorelated adjustments to the Company’s consolidated statement of cash flows andconsolidated statement of stockholders’ equity.

 

The effect of the restatement on specificamounts provided in the consolidated financial statements is as follows:

 

| ** **                      | ** ** | **As of June 30, 2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|
| **Consolidated Balance Sheet**  | ** ** | **As previously reported**   | ** ** | **As restated** | ** ** |
|                            |       |                         |       |   |   |
| Accumulated deficit             |       | $                            | (218,150   | ) | $ | (216,726 | ) |
| Additional-paid-in capital      |       | 220,312                      |       | 218,888 |   |
| Total stockholders’ equity |       | 2,500                        |       | 2,500 |   |
|                                 |            |                              |            |  |  |  |  |

 

7

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In addition, the Companyhas included restatements to reflect certain clarifications made in response tothe SEC’s comments as raised in its review of the Company’s registrationstatement on Form SB-2 as filed with the SEC on May 24, 2005, on Form SB-2/Aas filed with the SEC on August 30, 2005 and on Form 10KA as filedwith the SEC on August 30, 2005. These restatements include expandedclarifications on the preferred stock transaction the Company completed in June of2004, liquidity and going concern considerations and changes to the Notes toConsolidated Financial Statements.

 

3    Liquidity and Going ConcernConsiderations -Restated

 

As of June 30, 2005 the Company had cashand cash equivalents of $7,520. The operating cash usage from continuing operationsfor the three and six months ended June 30, 2005 was $2,714 and $5,922,respectively. The funds we received as a result of private placements of oursecurities on December 1, 2003, December 4, 2003, January 21,2004, April 22, 2004, June 23, 2004 and December 15, 2004, havepermitted us to fund the development of our new business.

 

In December 2003 and January 2004,WorldGate received proceeds from investments aggregating $3,100 by certaininstitutional investors. These investors purchased an aggregate of 3,000,000shares of newly issued common stock. The investors also received a right, for alimited period of time, to purchase additional shares of up to 20% of thecommon stock purchased by the investors in their investment, at the same priceas their investment, and five-year warrants to purchase up to 30% of the commonstock purchased by the investors in their investment, at an exercise priceequal to a twenty-five percent premium to their purchase price for theinvestment. The purchase price for the 2,000,000 shares purchased in the December 2003transactions were $0.80 per share, with the warrants having a $1.00 per shareexercise price. The purchase price for the 1,000,000 shares purchased in the January 2004transaction was $1.50 per share, with the warrants having a $1.875 per shareexercise price. All additional investment rights associated with the December 2003transaction were exercised during January and February of 2004,resulting in an incremental investment of $320. All additional investmentrights associated with the January 2004 transaction were exercised in May 2004,resulting in an incremental investment of $300. A portion of the warrants andadditional investment right warrants associated with the December 2003 andJanuary 2004 transactions were exercised in December 2004 and January 2005,resulting in an incremental investment of $925.

 

In December 2003, WorldGate announcedthat it reached agreement with Mototech, Inc. (not an affiliate ofMotorola) for the purchase of 625,000 shares of newly issued commonstock at $0.80 per share, in return for future design and engineering servicesby Mototech.  WorldGate previouslyannounced in November 2003, that it had contracted with Mototech to assistthe Company with the design and volume manufacture of WorldGate’s Ojo personalvideo phone. The purchase price for these shares will be paid by an equivalentreduction in the development and initial procurement payments that wouldotherwise be due to Mototech.  The valueof this transaction was $600 (based on the closing stock price of $0.96 on thedate of the transaction) of which $200 was recorded as an expense for the yearended December 31, 2003 and $400 was expensed for the year ended December 31,2004.  Mototech is an affiliate of AcctonTechnology Group, a group of Taiwanese manufacturers that we believe arewell-known in the electronics industry.  They currently manufacture and distribute afull range of high performance high speed data and computer networkingproducts, including cable set top boxes, home gateways, wireless LANs, hubs,switches, routers, and other related products. In addition, in April 2004, Mototech invested $1,000to purchase 666,666 shares of newly issued common stock at $1.50 per share.

 

In June 2004, WorldGate completed aprivate placement of 7,550 shares of its Preferred Stock at a stated value of$1,000 per share. The Preferred Stock has attached warrants and conversionoptions. Specifically, the holders of the Preferred Stock may convert theirshares into our common stock at a conversion price of $2.35 per share. Inaddition, the Company may force conversion of the Preferred Stock into commonstock if the Company achieves certain price targets for its common stock andsatisfaction of certain other conditions. In either event the conversion priceis subject to adjustment in the event the Company enters into anothertransaction which is dilutive to the subject transaction. As part of thistransaction, the Company has also issued five-year warrants to purchase1,606,383 shares of the Company’s common stock, one-half of the warrants at anexercise price of $2.69 per share and the remaining half at an exercise priceof $3.14 per share. The investors also received an additional investment right,for a limited period of time, to purchase 1,606,383 additional shares of commonstock shares at $3.14 a share.  Thepreferred stock has a dividend rate of 5% per annum, payable quarterly, eitherby cash or through the issuance of common stock at the Company’s option. ThePreferred Stock has a staged maturity over three years with one-third of thepreferred

 

8

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stock to be redeemed after 18 months, one-third after 24 months andone-third after 36 months, and may be redeemed at maturity in cash or, subjectto certain conditions, through the issuance of common stock, at the Company’soption (with stock payments being made at the then current market price). Ofthe 7,550 preferred shares issued under this private placement, all but 2,425shares have been redeemed as of June 30, 2005.

 

In December 2004,WorldGate completed a private placement of 208,333 shares of our common stockto K. Y. Chou, President and General Manager of Mototech, at a sales price of$2.40 per shares, which resulted in additional gross proceeds to the Company of$500. In connection with this placement the Company granted warrants to Mr. Chouto purchase up to 62,500 shares of our common stock at an exercise price of$2.88 per share.

 

The Company had $7,339 of liabilities and itsassets are not pledged as collateral as of June 30, 2005. Theseliabilities include $3,892 of dividends, detachable warrants and conversionoptions related to the Company’s private placement of Preferred Stock.

 

Our Company has suffered recurring lossesfrom operations and had a net accumulated deficiency of $218,000 as of December31, 2004, and these issues raise substantial doubt about our Company’s abilityto continue as a going concern. Our short term cash requirements andobligations include inventory, accounts payable and capital expenditures fromcontinuing operations, operating expenses, and the redemption of preferredstock, of which $808 is required to be redeemed in December 2005 and $808in June 2006, although these redemptions can be made in common stock ifcertain conditions are met. We expect, based on our internal forecasts andassumptions relating to our operations (including among others, assumptionsregarding our short term cash requirements and our projected revenue growth)that we have sufficient cash on hand to meet our obligations for at least thenext twelve months.

 

Our ability to generate cash is dependantupon the sale of our Ojo product and on obtaining cash through capitalmarkets.  We began generating revenuefrom commercial shipment of our Ojo product in April, 2005 and we expectrevenues to increase as the product continues to roll out to the marketplace.This increased level of sales activity is projected to have a positive impacton our cash flows from operations, which will support our ability to meet ourobligations beyond the next twelve months. Given that our video phone businessinvolves the development of a new product line with no market penetration, inan undeveloped market sector, no assurances can be given that sufficient sales,if any, will materialize.

 

Additionally, as needed, we plan to generatecash by turning to the capital markets for funding. No assurances can be giventhat, if pursued, additional financing transactions can be consummated.  We continue to evaluate possibilities toobtain additional financing through public or private equity or debt offerings,bank debt financing, asset securitizations, or from other sources, should weneed to obtain such financing.  Suchadditional financing would be subject to the risk of availability, may bedilutive to our shareholders, or could impose restrictions on operatingactivities. There can be no assurance that this additional financing will beavailable on terms acceptable to us, if at all.

 

We, however, remain hopeful that sufficientsales will materialize and/or that sufficient funding can be developed throughongoing operations or additional financings to continue our operations beyondthe next twelve months.

 

Our long term cash requirement obligationsare primarily comprised of the items noted above. We have no long term debt andour contractual cash requirements and obligations existing beyond the nexttwelve months are comprised solely of operating lease commitments andredemption of preferred stock, which are not considered material.  We have limited capacity to further reduceour workforce and scale back on capital and operational expenditures todecrease our cash usage.

 

4    Recent Accounting Pronouncement.

 

In November 2004, the FASB issued SFASno. 151 “Inventory Costs” which amends the guidance in ARB No. 43, Chapter4 “Inventory Pricing,” to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage).  Paragraph 5 of ARB 43, Chapter 4, previouslystated that under some circumstances, items such as idle facility expense,excessive spoilage, double freight and rehandling costs may be so abnormal asto require treatment as current period charges.”  SFAS No. 151 requires that those itemsbe recognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.”  In addition,SFAS No. 151 requires that allocation of fixed production overheads to thecosts of conversion be based

 

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on the normal capacity of the production facilities.  SFAS No. 151 is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005.  Earlier application is permitted forinventory costs incurred during fiscal years beginning after the date SFAS No. 151was issued.  SFAS No. 151 is to beapplied prospectively.  The Company doesnot expect the adoption of SFAS No. 151 to have a material effect on itsconsolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 153“Exchanges of Nonmonetary Assets” which amends APB Opinion No. 29, “Accountingfor Nonmonetary Transactions.”  APB No. 29is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged.  The guidance in that Opinion, however,included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance.  A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  SFAS No. 153 is effective for nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15,2005.  Earlier application is permittedfor nonmonetary asset exchanges occurring in fiscal periods beginning after thedate SFAS No. 153 was issued.  SFAS No. 153is to be applied prospectively.  TheCompany does not expect the adoption of SFAS No. 153 to have a materialeffect on its consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” that focuses primarily on accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions. This statement replaces SFAS No. 123, “Accountingfor Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” Beginning with our annual periods that beginafter June 15, 2005, we will be required to expense the fair value ofemployee stock options and similar awards. As a public company, we are allowedto select from two alternative transition methods, each having differentreporting implications.

 

Subsequently, in April 2005, the SECissued Release 2005-57, which allows companies to implement Statement No. 123(R) at the beginning of their next fiscal year, instead of the next reportingperiod that begins after June 30, 2005 as disclosed in the originalstatement No. 123 (R) release in December 2004. We are currentlyevaluating the impact of this standard and its transitional alternatives.

 

In March 2005, the Financial AccountingStandards Board (FASB) issued Interpretation No. 47 (FIN 47) to clarifythe guidance included in SFAS No. 143, “Accounting for Asset RetirementObligations”.  FIN 47 requires companiesto recognize a liability for the fair value of a legal obligation to performasset retirement activities that are conditional on a future event if theamount can be reasonably estimated.  Ifamounts cannot be reasonably estimated, certain disclosures will be requiredabout the unrecognized asset retirement obligations.  The interpretation is required to be adoptedin the first quarter of 2006.  We arecurrently evaluating the interpretation to determine the effect on ourfinancial statements and related disclosures.

 

In May 2005, SFAS No. 154, “AccountingChanges and Error Corrections – replacement of APB Opinion No. 20 and FASBStatement No. 3,” (SFAS No. 154) was issued. SFAS No. 154changes the accounting for and reporting of a change in accounting principle byrequiring retrospective application to prior periods’ financial statements ofchanges in accounting principle unless impracticable. SFAS No. 154 iseffective for accounting changes made in fiscal years beginning after December 15,2005. The Company does not expect the adoption of SFAS No. 154 to have amaterial impact on its results of operations, financial position or cash flows.

 

5.                                       Inventories.

 

Inventoriesas of June 30, 2005 and December 31, 2004 are summarized as follows:

 
| ** **                                  | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Raw material (from discontinued operations) |       | $0                     |       | $1,622                     |       |
| Finished goods (from continuing operations) |       | 1,004                  |       | 46                         |       |
| Total Inventory                             |       | 1,004                  |       | 1,668                      |       |
| Inventory Reserve                           |       | 0                      |       | (1,622                     | )          |
| Inventory, net                              |       | $1,004                 |       | $46                        |       |

 

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6.                                       Accountingfor Preferred Shares and Derivative Shares (Restated)

 

The followinginformation has been restated to provide a more complete description of theaccounting method and policy related to redeemable preferred shares andderivative shares.

 

In June 2004, WorldGate completed a privateplacement of Preferred Stock. The Preferred Stock has a dividend rate of 5% perannum, payable quarterly, either by cash or through the issuance of commonstock at the Company’s option. The Preferred Stock has a staged maturity overthree years with one-third of the Preferred Stock to be redeemed after 18months, one-third after 24 months and one-third after 36 months, and may beredeemed at maturity in cash or, at the Company’s option, subject to certainconditions that may not be solely under the control of the Company, through theissuance of the number of shares of common stock determined by dividing theliquidation preference of the preferred shares by the then current marketprice.  If the effectiveness of theregistration statement lapses, the Company ceases to be listed on certainspecified exchanges and trading in the Company’s stock is suspended or a changein control occurs with respect to the Company, the Company may be required tosettle redemption of the preferred stock with cash instead of its commonshares.  Furthermore, since the marketprice of the Company’s common stock cannot be predicted, the actual number ofshares of the Company’s common stock that will be required if a redemption ismade through the issuance of common stock, can also not be predicted. Similarlythe amount of the cash penalties may not be determinable until such time as theevent triggering the cash payment is cured or removed.

 

The Preferred Stock has embedded conversionoptions. Specifically, the holders of the Preferred Stock may convert theirshares into the Company’s common stock at a conversion price of $2.35 pershare. In addition the Company may force conversion of the Preferred Stock intocommon stock if the Company achieves certain price targets for its common stockand satisfaction of certain other conditions, such as the existence of aneffective registration statement. In either event the conversion price issubject to adjustment if, at any time after the date the preferred shares wereissued, the Company issues or sells, or is deemed to have issued or sold, anyshares of the Company’s common stock for per share consideration less than theconversion price of the preferred shares on the date of such issuance orsale.  Accordingly, the number of commonshares issuable upon the conversion of the preferred shares cannot bepredicted.  Furthermore, net-cashsettlement may be required in the event of conversion default under certaincircumstances that may not be solely under the control of the Company.  If the effectiveness of the registration statementlapses, the Company ceases to be listed on certain specified exchanges andtrading in the Company’s stock is suspended or a change in control occurs withrespect to the Company, the Company may be required to settle a conversion ofthe preferred stock with cash instead of its common shares.

 

Also as part of the private placement theCompany issued five-year warrants to purchase up to 803,190 shares of ourcommon stock at an exercise price of $2.69 per share and five-year warrants topurchase up to 803,190 shares of our common stock at an exercise price of $3.14per share. The investors also received an additional investment right, for alimited period of time, to purchase 1,606,383 additional shares of common stockshares at $3.14 a share. This exercise price of the warrants is subject toadjustment if, at any time after the date the warrants were issued, the Companyissues or sells, or is deemed to have issued or sold, any shares of the Company’scommon stock for per share consideration less than the exercise price of thewarrants on the date of such issuance or sale. Accordingly, the number of common shares that will be issued upon theexercise of the warrants cannot be predicted. As of June 30, 2005, 125,000 warrants exercisable at $2.69 had beenexercised and 51,915 warrants exercisable at $3.14 had been exercised.  All of the additional investment rights hadbeen exercised as of June 30, 2005.

 

Of the 7,550 preferred shares issued under thisprivate placement,  4,250 shares wereredeemed in the quarter ended June 30, 2005  and all but 2,425 shares have been redeemedas of June 30, 2005.

 

With respect to the Company’s accounting for thePreferred Stock, EITF Topic D-98, paragraph 4, states that Rule 5-02.28 ofRegulation S-X requires securities with redemption features that are not solelywithin the control of the issuer to be recorded outside of permanent equity. Asdescribed above, the terms of the Preferred Stock include certain redemptionfeatures that may be triggered by events that are not solely within the controlof the Company, such as a potential failure in the Company’s ability tomaintain an effective registration statement. Furthermore, the actual number ofshares of common stock required to satisfy redemption is based upon the marketvalue of the common stock at the time of the redemption, which cannot bepredicted. Accordingly, the Company has classified the Preferred Stock astemporary equity and the value ascribed to the redeemable preferred stock uponinitial issuance, i.e. at June 23, 2004, was the amount received in thetransaction minus the fair value ascribed to the conversion options andwarrants. The initial value of the

 

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redeemablepreferred stock is accreted up to the redemption value (the amount received inthe transaction) over the future relevant periods using the interest method.The value of the redeemable preferred stock at June 30, 2005 was $1,858

 

The terms of the Preferred Stock include certainconversion options that represent derivative financial instruments underparagraph 12 of SFAS No. 133 and thus were separated from the PreferredStock and valued using the Black-Scholes option pricing model.  The conversion options include certainprovisions that could result in a variable number of shares to be issued uponconversion, adjustment to the strike price at which conversion shares will bedetermined, or the requirement for the Company to settle the conversion optionsin cash.  EITF 00-19, “Accounting forDerivative Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, state that if the conversion options require net cash settlement in theevent of circumstances that are not solely within the Company’s control theyshould be classified as a liability measured at fair value on the balancesheet.

 

The terms of the five-year warrants include cashpenalty provisions in the event that the Company fails to meet its obligationsto deliver registered shares to the warrant holder upon exercise and ananti-dilution provision that could result in a variable number of shares to beissued upon warrant exercise. Additionally, the terms and conditions of thewarrants provide for net settlement via cashless exercise whereby the sharesdelivered to the warrant holder would be readily convertible to cash. Inaccordance with EITF 00-19 and given the terms and conditions of the warrantsas outlined above, the Company has classified the warrants as a liability onits balance sheet measured at fair value using the Black-Scholes option pricingmodel.

 

The Company accounts for both the conversionoptions and warrants using the fair value method at the end of each quarter,with the resultant gain or loss recognition recorded against earnings. Both thewarrants and conversion options are valued using the Black-Scholes valuationmodel.Actualperiod close common stock prices, applicable volatility rates, and the periodclose risk-free interest rate for the instrument’s expected remaining life(continuously compounded), are the key assumptions used in the valuationcalculation. The WorldGate share price changed from $3.90 per share as of March 31,2005 to $3.24 per share at June 30, 2005 making the warrants and preferredstock conversion elements less valuable, and therefore less costly, relative totheir strike price. The result was a $2,466 non cash gain for the quarter endedJune 30, 2005.

 

7.                                       Stock-BasedCompensation (Restated).

 

The Company accounts for stock-basedcompensation in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure”.

 

TheCompany applies Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” and related interpretations in accounting forits plans, and accordingly, no compensation cost has been recognized for theCompany’s fixed stock based compensation. Had compensation cost been determined consistent with SFAS No. 123,as amended by SFAS No. 148, the Company’s net loss would have beenincreased to the following pro forma amounts:

 

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| ** **                                                                                                                          | ** ** | **For the Three Month Period  Ended June 30,** | ** ** | **For the Six Month Period  Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**                                            | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                          | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Net (loss)  income                                                                                                                  |       | (366                                                | )          | (1,944                                            | )          | 2,228 |   | (4,052 | ) |
| Add:  Stock-based employee compensation expense included in reported net (loss)  income, net of related tax effects                 |       | 0                                                   |       | 0                                                 |       | 0 |   | 0 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of tax of $0 |       | (206                                                | )          | (520                                              | )          | (400 | ) | (1,083 | ) |
| Pro forma  net (loss) income                                                                                                        |       | $                                                   | (572       | )                                                 | $          | (2,464 | ) | $ | 1,828 |   | $ | (5,135 | ) |
|                                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net (loss)  income per share:                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Net (loss)  income:                                                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                                   | (0.01      | )                                                 | $          | (0.07 | ) | $ | 0.07 |   | $ | (0.15 | ) |
| Fully  Diluted                                                                                                                      |       | $                                                   | (0.01      | )                                                 | $          | (0.07 | ) | $ | 0.06 |   | $ | (0.15 | ) |
| Net (loss)  income – pro forma:                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                                   | (0.02      | )                                                 | $          | (0.09 | ) | $ | 0.06 |   | $ | (0.19 | ) |
| Fully  Diluted                                                                                                                      |       | $                                                   | (0.02      | )                                                 | $          | (0.09 | ) | $ | 0.05 |   | $ | (0.19 | ) |

 

Such proforma disclosures may not be representative of future compensation expensebecause options vest over several years and additional grants are made eachyear.

 

8.                                       Commitmentsand Contingencies.

 

*Leases*

 

In 1998 the Company entered into a leasingarrangement for a building with an entity formed by non-employee investors. TheCompany stopped paying rent on this lease in May 2003, and in lieu of rentpayments the Company’s landlord, 3190 T General, Inc. (an entity formed bynon-employee investors in the Company), began drawing down the security depositfor the facility. Prior to stopping rent payments, the Company had commencednegotiations with its landlord for an amendment of its lease to reduce thespace commitment and the rent payable. These negotiations were not successful,and in September 2003, the Company’s landlord filed an action in the Courtof Common Pleas, Bucks County, Pennsylvania to perfect its interest to takepossession of the Company’s facility, and to establish damages for past rentand expenses. Although a judgment was granted allowing the Company’s landlordto regain possession of the facility, the Company remained in the facility andcontinued negotiations with its landlord. During 2004, the landlord deeded thefacility to its mortgage holders and negotiations commenced with GMAC asrepresentative for the mortgage holders. These negotiations were successful andin November 2004 the Company’s lease was amended with an effective date ofJune 2004 to reduce the lease obligation in line with the Company’s thencurrent space requirements, and to bring the Company current with respect toall outstanding back rent.  Subsequently,GMAC sold the building and we are now in negotiations with the new owner tofurther amend the lease to secure a lower rental rate and additional squarefootage. The current lease covers 22,176 square feet at an annual rate of $15per square foot, cancelable by either party with 90 days notice.

 

In November 2003, the Company enteredinto a 60 month lease for office equipment. As of June 30, 2005 thereremains a total of $20 to be paid over the remaining period of the lease.

 

* Significant Agreements and Transactions*

 

Net revenues from continuing operationsrecognized from an investor were approximately $1,399 and $0, respectively, forthe three months ended June 30, 2005 and 2004, and approximately $1,577and $0, respectively, for the six months ended June 30, 2005 and 2004.This investor accounted for approximately 100% of the revenues for the threeand six months ended June 30, 2005. This investor previously provided acash advance against product shipments. The balance of this advance receivedfrom this investor was $0 as of June 30, 2005. Accounts receivable fromthis investor were $1,072 as of June 30, 2005 and $0 at December 31,2004.

 

The Company has a current two year agreementwith an investor to provide the Company with engineering and developmentsupport. As a result of this agreement, the Company has expensed approximately$92 (included in

 

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continuing operations) and $0 (included in discontinued operations),for the three months ended June 30, 2005 and June 30, 2004,respectively, and approximately $158 (included in continuing operations) and $0(included in discontinued operations), for the six months ended June 30,2005 and 2004, respectively. Accounts payable to this investor amounted to$1,803 and $117 at June 30, 2005 and December 31, 2004, respectively.This agreement provided for contracted services, including hardware andsoftware development, and the creation and development of tools to facilitatethe Company’s engineering efforts. This agreement does not provide for ongoingroyalties, purchase provisions, or for any requirement to provide additionalfunding to the Company.

 

On April 28, 2004, we entered into aDevelopment and Distribution Agreement with General Instrument Corporationd/b/a the Broadband Communication Sector of Motorola, Inc., or Motorola.In connection with the Development and Distribution Agreement with Motorola, weissued warrants to Motorola to purchase 600,000 shares of our common stock,300,000 at an exercise price of $1.4375 per share and 300,000 at an exerciseprice of $1.75, and agreed to issue additional warrants to purchase up to anadditional 1,650,000 shares of our common stock, upon the achievement ofcertain product and sales milestones, at an exercise price based upon theaverage closing sales price of our common stock during the 20 day period precedingthe issuance of each warrant.

 

In June 2004,WorldGate completed a private placement of 7,550 shares of Preferred Stock at astated value of $1,000 per share. The Preferred Stock has attached warrants andconversion options. Specifically, the holders of the Preferred Stock mayconvert their shares into our common stock at a conversion price of $2.35 pershare. The private placement includes numerous provisions intended to protectthese institutional investors including a cash payment penalty of 1.0% per monthfor unredeemed preferred shares once registration of the shares lapse and untilthe registration again becomes effective. A registration statement for thesesecurities was originally filed containing fiscal 2003 financials, and an amendmentto this registration statement which would include fiscal 2004 financialstatements has not yet been filed.

 

9.                                       Net(Loss) Income per Share.

 

Basic and diluted net (loss) income percommon share is computed by dividing the net (loss) income available to commonstockholders for the period by the weighted average number of shares of commonstock outstanding during the period.  Thecalculation of diluted net (loss) income per common share excludes potentialcommon shares if the effect is antidilutive. Potential common shares comprise shares of common stock issuable uponthe exercise of stock options and warrants and the conversion of preferredstock.  For the six month periods ended June 30,2005 and 2004, there would have been a potential additional 1,272,256 and 12,968,818,respectively, shares assumed to be converted, that would have a dilutiveeffect, if the Company had income from continuing operations, or if the options’exercise price was less than the average market price of the common shares.

 

10.           Revenue recognition

 

Revenueis recognized when persuasive evidence of an arrangement exists, the price isfixed or determinable, the collectibility is reasonably assured, and thedelivery and acceptance of the equipment has occurred or services have beenrendered.  Management exercises judgmentin evaluating these factors in light of the terms and conditions of itscustomer contracts and other existing facts and circumstances to determineappropriate revenue recognition. Due to our limited commercial sales history, ourability to evaluate the collectibility of customer accounts requiressignificant judgment. The Company evaluates its equipment customer, and servicecustomers’, accounts for collectibility at the date of sale and on an ongoingbasis.

 

Presentlythe Company has only one customer for the purchase of its equipment and theagreement with this customer includes several elements relevant to revenuerecognition including: (a) The customer has no general right to return theproduct.  (b) The customer can earnwarrants upon the purchase of significant video telephony units and the valueof these warrants would result in a reduction of recognized revenue (the valueof these warrants is routinely monitored by the Company and is currently deemedto be insignificant, however, should the value of these warrants becomematerial an offset would be made against revenues). (c) Penalties arepayable to the customer if certain excessive field failure rates areexceeded.  (d) The Company and thecustomer share in the benefit achieved by product cost reductions. (e) Penaltiesare payable to the customer if the Company fails to deliver shipments on atimely basis. (f) The Company extends to the customer a limited productwarranty for a term not to exceed three years (the Company maintains a warrantyreserve based upon the percentage of product sales consistent with industrycomparable failure rates and the warranty period provided by the agreement.)

 

Revenuesare also offset with a reserve for any price refunds and consumer rebates consistentwith the Emerging Task Force (“EITF”) Issue 01-9, Accounting for ConsiderationGiven by a vendor to a Customer.

 

11.Risks and uncertainties

 

Ourprimary line of business is the development of video phone products andtechnology. We are still in the process of launching our first product based onthis technology and, although we have realized some revenues for the commercialsale of our product, the revenues to date have not been substantial. Given theearly stage of our product and the lack of operating history in the video phonebusiness, it is difficult to predict our future results.

 

Wehave entered into a six year distribution agreement with Motorola, Inc.for the marketing and distribution of our Ojo video phone. This agreementprovides for Motorola to be WorldGate’s exclusive distributor of its broadbandvideo phone products and for WorldGate to be Motorola’s exclusive supplier ofits broadband video phone products.  Although the agreement requiresMotorola to provide for certain marketing and promotional activities for theOjo video phone, there are no required sales quotas for the agreement to remainin effect, and Motorola controls the volume of the Company’s products beingdistributed.  Neither party can terminate the agreement except in cases ofuncured breaches of the agreement or as a result of insolvency events sufferedby the other party. After a period of 18 months following the commercialavailability of the Ojo video phone the mutual exclusivity will terminateunless Motorola elects to continue the mutual exclusivity after having achievedcertain minimum sales targets for the Ojo video phone. Motorola may, however,at its option, elect to terminate the exclusivity at any time.

 

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In the event mutual exclusivity terminates or is terminated, then for aperiod of twelve months thereafter, WorldGate will continue to be Motorola’sexclusive supplier of broadband video phones but will be free to sell videophones to customers other than certain defined Motorola accounts. During thistwelve month period, Motorola has a right of first refusal to accept and fillany orders for video phone products that WorldGate obtains from non-Motorolaaccounts, and is obligated to use good faith efforts to solicit and acceptproduct orders from Motorola accounts in a commercially reasonable manner.During any period of exclusivity under this agreement we are reliant uponMotorola and its distribution partners, including, for example, wholesalers,retailers and service providers, to provide the worldwide sales anddistribution of the Ojo video phone. If Motorola and its partners are notsuccessful, or if their activities do not lead to significant sales of ourproduct, our operating results will be adversely affected, our revenue could besignificantly reduced and we could lose potential customers.

 

We also depend on relationships with thirdparties such as contract manufacturing companies, chip design companies andothers who may be sole source providers of key components and services criticalfor the product we are developing in our video phone business. A formalrelationship with Mototech, Inc. (not an affiliate of Motorola) has beenestablished for the volume manufacture of Ojo. Mototech is currently thesole volume manufacturer of Ojo. Our agreement with Mototech allows eitherparty to terminate the agreement with 90 days prior notice.  If Mototech, Inc.or other providers of components and/or manufacturing services do not producethese components or provide their services on a timely basis, if the componentsor services do not meet our specifications and quality control standards, or ifthe components or services are otherwise flawed, we may have to delay productdelivery, or recall or replace unacceptable products. In addition, suchfailures could damage our reputation and could adversely affect our operatingresults. As a result, we could lose potential customers and any revenues thatwe may have at that time may decline dramatically.

 

12.                                 SubsequentEvent.

 

On August 3, 2005, the Company completeda private placement of $17,500 of its common stock and warrants with severalinstitutional investors. The Company issued 4,666,664 shares of its commonstock at $3.75 per share to the participating investors. The Company alsoissued five-year warrants to purchase a total of 1,633,333 shares of its commonstock, with an exercise price of $5.00 per share. The investors also receivedan additional investment right, for a limited period of time, to purchase1,554,000 additional shares of common stock at $4.12 a share.

 

ITEM 2.   MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

**FORWARD-LOOKINGAND CAUTIONARY STATEMENTS**

 

We may from time to time make written or oralforward-looking statements, including those contained in the followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.  The words “estimate,” “project,”“believe,” “intend,” “expect,” and similar expressions are intended to identifyforward-looking statements, although not all forward-looking statements containthese identifying words.  In order totake advantage of the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, we are hereby identifying certain importantfactors that could cause our actual results, performance or achievement todiffer materially from those that may be contained in or implied by anyforward-looking statement made by or on our behalf.  The factors, individually or in theaggregate, that could cause such forward-looking statements not to be realizedinclude, without limitation, the following: (1) difficulty in developingand implementing marketing and business plans, (2) industry competitionfactors and other uncertainty that a market for our products will develop, (3) challengesassociated with broadband service operators (including, uncertainty that theywill offer our products, inability to predict the manner in which they willmarket and price our products and existence of potential conflicts of interestsand contractual limitations impeding their ability to offer our products), (4) continuedlosses, (5) difficulty or inability to raise additional financing on termsacceptable to us, (6) departure of one or more key

 

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persons, (7) delisting of our Common Stock from the NASDAQ SmallCap Market, (8) changes in regulatory requirements, and (9) otherrisks identified in our filings with the Securities and ExchangeCommission.  We caution you that theforegoing list of important factors is not intended to be, and is not,exhaustive.  We do not undertake toupdate any forward-looking statement that may be made from time to time by oron our behalf.

 

Results of Operations:

 

General

 

Our ITV business hashistorically accounted for substantially all of our revenue.  In the thirdquarter of 2003, we completed a sale of significant assets, including our ITVintellectual property rights and our membership interest in TVGateway,LLC.  This transaction marked a shift in our business away from the ITVbusiness and toward a new video phone product and related business. Although we continued to support our remaining ITV business into the firstquarter of 2004, the development of our video phone product became a primarybusiness focus.

 

Our video phone business hasnot produced significant revenues to date.  The extent and timing offuture revenues for our business depends on several factors, including the rateof market acceptance of our products and the degree of competition from similarproducts.  We cannot predict to what extent our video phone product willproduce revenues, or when, or if, we will reach profitability.

 

Critical Accounting Policies and Estimates.

 

The consolidated financial statements areprepared in conformity with accounting principles generally accepted in theUnited States of America.  Thepreparation of these financial statements required management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

The significant accounting policies of theCompany are described in the notes to the consolidated financial statementsincluded in the annual report on Form 10-K.  Judgments and estimates of uncertainties arerequired in applying the Company’s accounting policies in many areas.  Following are some of the areas requiringsignificant judgments and estimates: revenue recognition, accounts receivable, inventories, cash flow andvaluation assumptions in performing asset impairment tests of long-livedassets, value of redeemable preferred stock, related warrants and conversionoptions.

 

Discontinued Operations

 

During the first quarter of 2004, wetransitioned from the business of developing and selling interactivetelevision, or ITV, technology, products and services for use in conjunctionwith cable TV broadband networks (the “ITV business”) to the development of ourvideo phone products as our primary business focus. During the three and sixmonths ended June 30, 2004, the Company had revenues from our discontinuedITV business operations of $82. Cost of revenues for the three and six monthsended June 30, 2004 was $43. Concurrently, operating expenses fromdiscontinued operations were $16 for the three and six months ended June 30,2004. For the three and six months ended June 30, 2004, other income, netof other expenses, relating to our discontinued ITV business operations were$6. There were no revenues, cost of revenues, operating expenses, and otherincome and other expenses from discontinued operations during the three and sixmonths ended June 30, 2005.

 

The information in our quarter-to-quartercomparisons below represents only our results from continuing operations.

 

Three and six Months Ended June 30, 2005 and June 30, 2004(Restated)

 

Revenues.

 

Revenues. Total gross revenues fromcontinuing operations for the three and six months ended June 30, 2005were $1,789 and $1,967, respectively. Net revenues for the three and six monthsended June 30, 2005 were $1,399 and $1,577, respectively. These revenuesrepresent deliveries of video phones for pre-market

 

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testing and for the initial launch of video phones for the consumermarket. As an incentive to promote delivery of the units, a special “ProductLaunch Discount” was provided by the Company to our distributor as a quantityrestricted reduction to the unit contract based price in effect. For the threeand six months ended June 30, 2005, this “Discount” was $390. There wereno revenues from continuing operations during the three and six months ended June 30,2004.

 

Costs and Expenses.

 

Cost of Revenues. The cost of revenues fromcontinuing operations, which consisted of product and delivery costs relatingto the delivery of video phones, was $1,266 and $1,390, respectively, for thethree and six months ended June 30, 2005. There were no costs of revenuesfrom continuing operations during the three and six months ended June 30,2004.

 

Engineering and Development.  Engineering and development expensesprimarily consist of compensation, and the cost of design, programming,testing, documentation and support of the Company’s video phone product.  Engineering and development costs were $1,373for the three months ended June 30, 2005, compared with $799 for the threemonths ended June 30, 2004, and $2,679 and $1,599, respectively, for thesix months ended June 30, 2005 and 2004. This increase of $574, or 72%,and $1,080, or 68%, respectively, for the three and six months ended June 30,2005 over 2004, reflects the Company’s increased concentration of itsengineering staff, and related costs, for the further and continuingdevelopment of its video phone product.

 

Sales and Marketing.  Sales and marketing expenses consistprimarily of compensation, attendance at conferences and trade shows, travelcosts, promotions and other marketing programs related to the marketing of theCompany’s video phone product.  Sales andmarketing costs were $640 for the three months ended June 30, 2005,compared with $408 for the three months ended June 30, 2004, and $1,018and $599, respectively, for the six months ended June 30, 2005 and2004.  This increase of $232, or 57%, and$419, or 70%, respectively, for the three and six months ended June 30,2005 over 2004, reflects the increased effort of staff, and related marketing,service and promotional expenditures associated with the launch and growth ofthe Company’s video phone business.

 

General and Administrative.  – as restated expenses consist primarily ofexpenditures for administration, office and facility operations, finance andgeneral management activities, including legal, accounting and professionalfees.  General and administrativeexpenses were $887 for the three months ended June 30, 2005, compared with$1,001 for the three months ended June 30, 2004, and $1,734 and $2,044,respectively, for the six months ended June 30, 2005 and 2004.  This decrease of $114, or 11%, and $310, or15%, respectively, for the three and six months ended June 30, 2005 over2004, is attributable to certain expenses incurred during the three and sixmonths ended June 30, 2004 that were not incurred during the three and sixmonths ended June 30, 2005. These expenses consisted of an expense forsales taxes of $125, and a reduction in rent expense of $241 and $437,respectively, for the three and six months ended June 30, 2005 compared tothe three and six months ended June 30, 2004.  For the three and six months ended June 30,2005 compared to the three and six months ended June 30, 2004, thesedecreases were offset by an increase in professional fees of $90 and 215,respectively.

 

Interest, Other Income and Interest Expense.Interest, other income and interest expense consist of interest earned on cashand cash equivalents, and interest expense on short-term debt. Interest and otherincome increased from $13 for the three months ended June 30, 2004 to $109for the three months ended June 30, 2005, and increased from $20 for thesix months ended June 30, 2004 to $175 for the six months ended June 30,2005, primarily due to additional interest income earned on a higher level ofinvested funds and an insurance refund settlement of $36. During the threemonths ended June 30, 2005, the Company earned interest on average cashbalances of approximately $6,362 and incurred interest expense related to itsinsurance financing. In comparison, during the three months ended June 30,2004 the Company earned interest on average cash balances of approximately$4,552 and incurred interest expense related to its insurance financing.  For the six months ended June 30, 2005,the Company earned interest on average cash balances of approximately $9,936compared to $4,817 for the six months ended June 30, 2004.

 

Income Taxes. The Company has incurred net operating losses since inception andaccordingly had no income taxes and has not recorded any income tax benefit forthose losses.

 

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Liquidity and Capital Resources.

 

As of June 30, 2005, our primary sourceof liquidity consisted of cash and cash equivalents that are highly liquid, areof high quality investment grade and have original maturities of less than 90days.

 

At June 30, 2005, we had cash and cashequivalents of $7,520 (and no short-term investments) as compared to cash andequivalents of $11,840 (and no short-term investments) at December 31,2004.  Net cash used in continuingoperations was $2,714 for the three months ended June 30, 2005, ascompared to $1,644 used for the same period in 2004. The net cash used incontinuing operations was $5,922 for the six months ended June 30, 2005 ascompared to $3,441 used for the same period in 2004.  This increase in net cash used for continuingoperations was primarily attributable to the Company’s increase in expendituresrelated to the video phone business.  TheCompany recorded bad debt expense in the amount of $16 from discontinuedoperations during the three and six months ended June 30, 2004 to reflectits current assessment of the collectability of certain receivables.

 

Cash provided by financing activities fromcontinuing operations during the three months ended June 30, 2005, totaled$583 compared to $8,535 provided during the same period in 2004. Cash providedby financing activities from continuing operations during the six months ended June 30,2005 was $1,924 as compared to $10,366 provided during the same period in2004.  Capital expenditures were $242 and$22 for the three months ended June 30, 2005 and 2004, respectively.  For the six months ended June 30, 2005and 2004 capital expenditures were $322 and $30, respectively.

 

Operations and Liquidity.

 

To date, the Company has funded operations primarilythrough private sales of equity securities and through an initial publicoffering of common stock in April 1999. As of June 30, 2005 the Company had cash, and cash equivalents of$7,520.  The operating cash usage fromcontinuing operations for the three months ended June 30, 2005 and 2004was $2,714 and $1,644, respectively. Operating cash usage from continuingoperations for the six months ended June 30, 2005 and 2004 was $5,922 and$3,441, respectively.  As of June 30,2005 we have no outstanding debt and our assets are not pledged as collateral.

 

The Company has funded operations through the privateplacement of our common stock in January 2004, which provided proceeds of$1,500, the private placement of our common stock in April 2004 providingproceeds of $1,000, the June 2004 private placement of our redeemablepreferred stock providing proceeds of $7,550, the private placement of commonstock in December 2004 providing $500, the exercise of additionalinvestment rights and warrants providing $6,800 in January, February, May andDecember 2004 and January, February, and April 2005, the exercise byemployees and former employees of options throughout 2004 and January throughJune 2005 providing aggregate proceeds of $1,171, and the August 2005private placement of common stock, together with additional rights andwarrants, providing $17,500. We do however have an obligation to pay dividendson, as well as to redeem, our outstanding Preferred Stock upon maturity, or atthe earlier option of a holder of these securities. Under certain limitedcircumstances we may be forced to make such payments and redemptions with cashinstead of shares of our common stock. In such event our ability to fundcontinuing operations would be negatively impacted.

 

The report of the independent registeredpublic accounting firm for the year ended December 31, 2004 included anexplanatory paragraph stating that our Company had suffered recurring lossesfrom operations and had a net accumulated deficiency of $218,000, and thatthese issues raised substantial doubt about our Company’s ability to continueas a going concern. Our short term cash requirements and obligations includeinventory, accounts payable and capital expenditures from continuingoperations, operating expenses, and the redemption of preferred stock, of which$808 is required to be redeemed in December 2005 and $808 in June 2006,although these redemptions can be made in common stock if certain conditionsare met. We expect, based on our internal forecasts and assumptions relating toour operations (including among others, assumptions regarding our short termcash requirements and our projected revenue growth) that we have sufficientcash on hand to meet our obligations for at least the next twelve months.

 

Our ability to generate cash is dependantupon the sale of our Ojo product and on obtaining cash through capitalmarkets.  We began generating revenuefrom commercial shipment of our Ojo product in April, 2005 and we expectrevenues to increase as the product continues to roll out to the marketplace.This increased level of sales activity is projected to have a positive impacton our cash flows from operations, which will support our ability to meet ourobligations beyond the next twelve months. Given that our video phone businessinvolves the

 

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development of a new product line with no market penetration, in anundeveloped market sector, no assurances can be given that sufficient sales, ifany, will materialize.

 

Additionally, as needed, we plan to generatecash by turning to the capital markets for funding. No assurances can be giventhat, if pursued, additional financing transactions can be consummated.  We continue to evaluate possibilities toobtain additional financing through public or private equity or debt offerings,bank debt financing, asset securitizations, or from other sources, should weneed to obtain such financing.  Suchadditional financing would be subject to the risk of availability, may bedilutive to our shareholders, or could impose restrictions on operatingactivities. There can be no assurance that this additional financing will beavailable on terms acceptable to us, if at all.

 

We, however, remain hopeful that sufficientsales will materialize and/or that sufficient funding can be developed throughongoing operations or additional financings to continue our operations beyondthe next twelve months.

 

Our long term cash requirement obligationsare primarily comprised of the items noted above. We have no long term debt andour contractual cash requirements and obligations existing beyond the nexttwelve months are comprised solely of operating lease commitments andredemption of preferred stock, which are not considered material.  We have limited capacity to further reduceour workforce and scale back on capital and operational expenditures todecrease our cash usage.

 

In December 2003, WorldGate reached agreement withMototech, Inc. (not an affiliate of Motorola) for the purchase of 625,000shares of newly issued common stock at $0.80 per share, in return for futuredesign and engineering services by Mototech. WorldGate had previously contractedwith Mototech to assist the Company with the design and volume manufacture ofWorldGate’s Ojo personal video phone. The purchase price for these shares hasbeen fully paid as of December 31, 2004 by an equivalent reduction in thedevelopment and initial procurement payments that would otherwise be due toMototech. The value of this transaction was $600 (based on the closing stockprice of $0.96 on the date of the transaction) of which $200 was recorded as anexpense for the year ended December 31, 2003 and $400 was expensed for the yearended December 31, 2004.  Mototech is anaffiliate of Accton Technology Group. Mototech currently manufactures anddistributes a full range of high performance high speed data and computernetworking products, including cable set top boxes, home gateways, wirelessLANs, hubs, switches, routers, and other related products. In addition, in April 2004,Mototech invested $1,000 to purchase 666,666 shares of newly issued commonstock at $1.50 per share.

 

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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Interest Rate Risk.  Our exposure to market risk related tochanges in interest rates relates primarily to our investment portfolio.  We invest in instruments that meet highcredit quality standards, and we limit the amount of credit exposure withrespect to any one issue, issuer and type of investment.

 

As of June 30, 2005, the Company’s cashand cash equivalents were $7,520, having an original maturity of less than 90days, and it had no short-term investments. Due to the average maturity and conservative nature of our investmentportfolio, management believes a sudden change in interest rates would not havea material effect on the value of the portfolio. Management estimates that hadthe average yield of our investments decreased by 100 basis points, ourinterest income for the six months ended June 30, 2005 would havedecreased by approximately $43. This estimate assumes that the decreaseoccurred on the first day of 2005 and reduced the yield of each investmentinstrument by 100 basis points.  Theimpact on our future interest income of future changes in investment yieldswill depend largely on our total investments.

 

Foreign Currency Exchange Risk.  Although we transact business in variousforeign countries, the principal portion of our business is in the UnitedStates and substantially all of our revenues and costs to date have beendenominated in U.S. dollars.  Althoughour agreement with Mototech (not an affiliate of Motorola), our contract manufacturer in Taiwan,is denominated in U.S. dollars, their material acquisition costs are subject toexchange rate changes that could impact our product costs.

 

# ITEM4.     CONTROLS AND PROCEDURES.

 

As of the endof the period covered by this Form 10-Q, our management, with the participationof our chief executive officer and chief financial officer, conducted anevaluation of the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of1934, as amended (the “Exchange Act”)).

 

Based on thatevaluation, our chief executive officer and chief financial officer determinedthat we have a material weakness (as defined under the standards established bythe American Institute of Certified Public Accountants) that exists withrespect to our reporting of complex transactions. As a result of this materialweakness, on November 17, 2004 we restated our financial statements in ourannual and quarterly reports from our Form 10-Q for the quarter ended March 31,2004 through this report.

 

To addressthis material weakness, we have engaged outside experts to provide counsel andguidance in areas where we cannot economically maintain the required expertiseinternally (e.g., with the appropriate classifications and treatments ofcomplex and non-routine transactions).

 

As a result ofthe material weakness identified with respect to our reporting of complextransactions, the chief executive officer and chief financial officer concludedthat our disclosure controls and procedures are not designed and effective inensuring that the information required to be disclosed by our company in thereports that we file and submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Commission’srules and forms.  Except as identifiedabove, there have been no changes in our internal control over financialreporting that occurred during the quarter ended June 30, 2005, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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PART II.OTHER INFORMATION

 

(Dollar Amounts are inThousands, Except per Share Amounts)

 

# ITEM 1.     LEGALPROCEEDINGS.

#  

None

 

# ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS.

#  

On June 24, 2004, we completed a privateplacement that resulted in the issuance of 7,550 shares of preferred stock at asale price of $1000 per share (which preferred stock is convertible into ourcommon stock at a conversion price of $2.35 per share), five-year warrants topurchase up to 803,190 shares of our common stock at an exercise price of $2.69per share, and five-year warrants to purchase up to 803,190 shares of ourcommon stock at an exercise price of $3.14 per share. The investors alsoreceived an additional investment right, for a limited period of time, topurchase 1,606,383 additional shares of common stock shares at $3.14 a share. TheJune 2004 private placement resulted in gross proceeds to our Company of$7,550. From November 2004 through April 15, 2005, holders of thepreferred stock from the June 24, 2004 private placement have converted5,125 of their shares, resulting in the issuance of 2,180,851 shares of ourcommon stock based upon the $2.35 conversion price. Furthermore, between January 2004and April 18, 2005, the investors from the 2003 and 2004 privateplacements have exercised warrants and additional investment rights resultingin additional gross proceeds of approximately $7,089 and the issuance of3,134,048 shares.

 

# ITEM3.  DEFAULTS UPON SENIOR SECURITIES.

#  

None.

 

# ITEM4.     SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.

#  

None.

 

# ITEM 5.  OTHER INFORMATION.

#  

None.

 

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ITEM 6.  EXHIBITS.

 

(a) Exhibits.

 

The following is a list of exhibits filed aspart of this report on Form 10-Q. Where so indicated by footnote, exhibits that were previously filed areincorporated by reference.  For exhibitsincorporated by reference, the location of the exhibit in the previous filingis indicated parenthetically except in those situations where the exhibitnumber was the same as set forth below.

 

 
| **Exhibit** | ** ** | **Description**                                                                                                                                       |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Amended and Restated Certificate of  Incorporation (3)                                                                                                |
| 3.2         |       | Amended and Restated Bylaws (1)                                                                                                                       |
| 3.3         |       | Certificate of Amendment to Certificate of  Incorporation, dated October 18, 2004 (3)                                                            |
| 3.4         |       | Certificate of Designations, Preferences  and Rights of the Series A Convertible Preferred Stock of the Company  dated June 23, 2004 (2)    |
| 31.1        |       | Certification of Chief Executive Officer  Pursuant to Rule 13a-14(a)*                                                                            |
| 31.2        |       | Certification of Chief Financial Officer  Pursuant to Rule 13a-14(a)*                                                                            |
| 32.1        |       | Certification of Chief Executive Officer Pursuant  to 18 U.S.C. Section 1350, as adopted by Section 906 of the  Sarbanes-Oxley Act of 2002* |
| 32.2        |       | Certification of Chief Financial Officer  Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of  the Sarbanes-Oxley Act of 2002* |

 

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* Filed herewith

(1) Incorporated by reference to the exhibits to our Form 10-QReport for the quarter ended March 31, 1999.

(2) Incorporated by reference to the exhibits to our Form 8-KCurrent Report filed on June 25, 2004 (Exhibit 3.1).

(3)Incorporated by reference to the exhibits to our Form 10-QReport for the quarter ended September 30, 2004, as filed on November 17,2004.

 

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                                                                                                                                     | WORLDGATE COMMUNICATIONS, INC. |
|------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|
|                                                                                                                                     |                           |   |
|                                                                                                                                     |                           |   |
| Date:                    January 23, 2006 |                           | /s/ Hal M.  Krisbergh |   |
|                                                                                                                                     |                           | Hal M. Krisbergh |
|                                                                                                                                     |                           | Chairman and Chief Executive Officer |
|                                                                                                                                     |                           | (Principal Executive Officer) |
|                                                                                                                                     |                           |   |
|                                                                                                                                     |                           |   |
| Date:                    January 23, 2006 |                           | /s/ Joel Boyarski |   |
|                                                                                                                                     |                           | Joel Boyarski |
|                                                                                                                                     |                           | Vice President and Chief Financial Officer |
|                                                                                                                                     |                           | (Principal Financial and Accounting  Officer) |

 

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